Dramatic Return Of Irish Property Market

The property market in Ireland has been hitting the headlines in a big way over the past 12 months. After spending years spinning downward into what looked like a black hole it might never emerge from, the market bounced back—in dramatic fashion.

With around half the value of the average home wiped out—and after years of distressed property auctions at which homes were sold off at 80% and even 90% discounts—things suddenly changed. A bottom was reached, and price declines slammed into reverse.

In December of 2014, Knight Frank’s global property index revealed that Ireland had beaten Turkey, Dubai, and the U.K. and had the world’s fastest-growing real estate prices. The little green island’s annual growth rate hit 15% in the 12 months ending September 2014.

At a glance, this looks like the same old pattern of boom to bust we’ve seen in the Irish market time and again. But there’s more to it this time.

Six Reasons This Irish Boom Is Not About To Bust Like The Last One

When you look a little closer, there are some key differences between the last, ultimately doomed property boom and what we’re seeing in Ireland today. Those differences leave the door wide open for overseas investors to step in and make a killing.

Speculation Vs. Buy-To-Live: What fueled much of the property bubble that culminated in the crash of 2008 was property speculation among Irish homeowners. Prices had been rising for so long and at such a speed, that a second home looked like a fantastic investment to a lot of people. Everyone and their mother became a landlord, renting out their second property and using the rent to pay off their mortgage.

With plenty of liquid credit to fuel the drive, construction companies threw together homes in increasingly out-of-the-way locations with little by way of amenities in the locality. Whole estates were being bought pre-construction by people who had no intention of ever living in the houses they purchased. Speculation on poor-quality product was a key factor in the crash. When it came, “ghost estates”—whole streets of these empty, low-grade properties—were left behind with nobody to live in them.

Compare that to today. Rather than speculators, today’s buyers are primarily first-time buyers and owners looking to upsize. This is a real demand for houses that will be lived in by their owners, not speculation on properties in the hope that they appreciate or produce a good rental yield.

The Lenders: For anyone in the domestic market hoping to speculate on property, this isn’t the simple prospect it was last time around. After coming close to the brink of collapse, the banks are far, far tighter with their lending practices.

Mortgages were being thrown around in the early- to mid-2000s as letters poured through the door offering mortgages to people who never even asked for one. Those days are gone. The banks are still reeling from the last crash and they simply will not lend to anyone who isn’t solid.

The Central Bank: The Irish Central Bank stood accused of being asleep at the wheel when the country sleepwalked its way into the last property crash. But this time around, it is making its presence felt. It has just slapped banks with stringent lending rules that have spelled the end of the 100%-mortgage concept.

Now, banks are only permitted to lend 80% of a total home price, meaning borrowers have to stump up a deposit covering the rest. This is a move designed to protect lenders first and foremost. But it will also dampen down speculation and make it harder for less-than-qualified buyers to get onto the ladder.

This move will trigger a slowdown in the property price rises we’ve being seeing, but, fundamentally, it will do nothing to alleviate the demand for homes. The slowdown this will bring will be short-term and temporary.

In fact, the lull in buying activity that this change will trigger is the ideal time for an overseas buyer to step in and make their move.

The Pent-Up Demand: Hardly a home was bought in Ireland for the five years after 2008. People still wanted to own a home of their own, but, with prices in free fall, a wait-and-see attitude was adopted. Now, after a long wait and with property prices going back in the right direction, people see it as the right time to make their move.

But, today, there is five years’ worth of pent-up demand for houses and simply not enough properties on the market to go around. With that sort of dynamic in place, prices in the medium- to long-term will likely only go up—not due to speculation but to a real pent-up demand.

The Supply Gap: One of the big casualties of the recession in Ireland was the construction industry. There was a huge overreliance on the building trade for employment and tax receipts during the boom, and, when the crash came, a heavy price was paid. Many of the country’s biggest construction firms went bust, leaving hundreds of thousands of skilled construction workers out of their jobs. Worse, the old Irish way of dealing with tough times at home returned, and emigration hit levels not seen since the Great Famine era of the 1840s.

Aside from the human tragedy involved in a country losing half a generation of its young people to Australia, Canada, and elsewhere, this loss of both companies and workers has left a gaping hole in the supply of houses. Not enough new houses are coming online to cover the demand. It’s not even close. Without the firms or manpower to ramp up supply in the medium-term, this shortage of supply is set to continue well into the future.

The Price Point: The average asking price of a property in Ireland is now 193,000 euros (US$218,000)—12.8% higher than a year ago. That’s a big increase.

But when you take a look at the bigger picture, that’s still a dramatically reduced price tag when set against the 378,000 euro (US$427,000) average home price at the peak of the last boom in 2007. Depending on the source, figures vary slightly. But, right now, you’re looking at a countrywide discount of about 39% versus the pre-crisis peak in 2007.

American Buyers Are Getting Even More Help From The Strong Dollar

Right now, 1 euro equals US$1.13. That’s extremely good news for U.S. buyers hoping to dip their toes in a Eurozone market like Ireland. In fact, the last time the exchange rate was so favorable for this type of transaction was in 2004.

Where To Buy In Ireland Today

As you might expect, the capital, Dublin, has led the charge in property price increases. As the main center of employment, working families simply have to live here. Prices have risen massively, so there are no real discount buys left. In other words, that ship has sailed.

There has also been an impact on prices in the commuter belt counties adjacent to Dublin (Meath, Wicklow, Louth, etc). However, there has been a serious lag beyond that.

Prices are rising again pretty much all over, but growth beyond the Dublin commute has come far later, it’s more gradual, and it’s from a lower start point. A good place to focus your attention is in and around the country’s secondary cities—places like character-rich Cork or lively Galway.

In Galway, there is a townhouse on the market in the Salthill area, seconds from the sea and within a stroll of the city center. It’s a three-bed historical home that comes with a small garden, and it’s on the market right now for 180,000 euros (US$203,000).

If you like the idea of a more quintessentially Irish home, then try this traditional pub with accommodation above in County Cork. It’s in the rural town of Rathpeacon, which, while quiet and very much rural, is just minutes from the center of Cork city. Fully fitted and ready to go back into business as a pub, it could also be easily converted back into a house. Remarkably, it’s on the market for just 200,000 euros (US$226,000).

So do I think real estate prices in Ireland are going to keep notching up 16% growth rates a year forever more? Of course not. For a start, the measures introduced by the Central Bank will have a cooling effect on the market, slowing the growth rate down in the medium-term.

Another factor is Nama, the state-run bank that mopped up thousands of nonperforming loans and properties during the crash. Many of these properties have not yet been released onto the market. When they are, it will go some way to alleviating the demand that is fueling the price increases.

That said, it simply won’t be enough to deal with the simple short-supply, huge-demand situation the country is in right now. In the near- to mid-term, prices will keep rumbling upward.

Rob Carry is a correspondent for the free weekly Overseas Property Alert.